The Fed has kept borrowing costs near zero since the economy
started to falter nine years ago, but is now normalizing interest
rates, as inflation gradually rises and the labor market
improves.

Trump's massive infrastructure-spending plan could trigger a much
faster jump in inflation. It's not guaranteed, and there are
questions about how much of the
promised economic growth it would actually spur. But
since the election, interest-rates traders have priced in a much
steeper trajectory for inflation.

"There's a very real possibility that if he's able to deliver a
big fiscal stimulus, the Fed thinks it would be inflationary,"
said Luke Bartholomew, a fixed income investment manager at
Aberdeen Asset Management.

If the Fed rapidly hikes rates to keep the economy
from overheating, "there’s a good chance that Trump might view
that as an attempt to undermine his plan given how hostile he’s
been towards the central bank," he
said. "That could lead to ashowdownbetween President and central bank
which financial markets would not take kindly."

On the other hand, in October, Fed Chair Janet Yellen said that
there were merits to a "high-pressure
economy" characterized by high aggregate demand, which could
repair some of the damage the recession caused. It was not a
promise of a future policy approach, but showed the Fed's
readiness to keep rates lower than might be expected.

The Fed could as well sit back and allow Trump's
fiscal-stimulus boost to overheat the economy. However,
it would not want to be seen as doing Trump's bidding,
Bartholomew told Business Insider, because it
values its independence.

'We do not discuss politics at our meetings'

Trump already appears to be at odds with Yellen. While
campaigning, he said the Fed kept rates low for
political reasons to put a recession on the next
president.

Afterwards, Yellen responded to questions about political
interference and conflict from members of Congress
and the press. She said the Fed
did not discuss politics in meetings. But the Fed
remains vulnerable to
political backlash because of the unusual steps it took
to heal the economy after the recession, according to Elga
Bartsch, Morgan Stanley's chief European economist.

Even in a tenuous climate under Trump, Yellen will probably
remain as chair until her term ends in early 2018. For one,
resigning would create the direct impression of White House
interference.

Ultimately, any showdown between the Fed and Trump could mark the
definitive end of near-zero interest rates and unusual policy.

Trump's fiscal plan is "pretty good news for the Fed," said Dan
North, the chief economist at Euler Hermes North America.

"They’re going to be happy about the inflationary aspect because
now, it will give them the room to start to really normalize
rates," he said.